Obama threatens to end tax breaks for outsourcing

SummaryThe US President Barack Obama on Thursday issued a veiled threat on offshoring saying that he would end tax breaks that encourage companies to create jobs and profits outside the US—a threat that analysts said would impact multinational firms more than any Indian IT services firms.

The US President Barack Obama on Thursday issued a veiled threat on offshoring saying that he would end tax breaks that encourage companies to create jobs and profits outside the US—a threat that analysts said would impact multinational firms more than any Indian IT services firms.

The president was speaking in Cleveland, Ohio. The state has proposed to ban offshoring of all government IT projects. Ohio’s unemployment rate is higher than the national average of 9.5%.

“For years, our tax code has given billions of dollars in tax breaks, encouraging firms to create jobs in other nations. I want to change that,” the President said. Instead of tax loopholes that incentivise investments in overseas jobs, he will propose a “generous, permanent extension of tax credit that goes to firms for research and innovation done in the US”.

This is not the first time that the President has spoken about loopholes in the US tax code. In May last year, Obama had proposed to close loopholes in a tax code that says “you should pay lower taxes if you create a job in Bangalore, than one in Buffalo, New York.”

Lobby bodies in India had been arguing that China has more subsidiaries of US corporations against Bangalore.

Sudin Apte of Forrester Research said if the president’s proposals translate into law, it will cripple MNCs with captive centres in India, disrupting their cost models. The US-based firms such as IBM, HP, Oracle and Microsoft will become less competitive.

Currently, any income that is earned by US corporations outside the country is not taxed until it is brought into the US. Obama proposes to change this with a two-fold aim—raise revenues of the US government and create employment. By denying deductions on expenses made for offshore payments, the US government can ensure that it gets more expensive for US firms to operate subsidiaries. This, in turn, will encourage more job creation in the US, the thinking goes.

Industry watchers told FE that it is too simplistic an argument. Tax reliefs are just one part of the story. “Outsourcing is a business requirement and is mostly because of cost arbitrage. The costs of compliance, health insurance and other labour-related issues are much higher in the US. If US firms find that even with the added tax liability factored in, the cost of outsourced labour is cheaper than US labour, they will continue to outsource,” a former executive with IBM